Notice 700 The VAT guide

Transcription

1 1 HM CUSTOMS AND EXCISE Notice 700 The VAT guide April Includes updates at the end of this document This notice cancels and replaces Notice 700 (March 2000). Details of any changes to the previous version can be found in paragraph 1.2 of this notice. Further help and advice If you need general advice or more copies of Customs and Excise notices, please ring the National Advice Service on You can call between 8.00 am and 8.00 pm, Monday to Friday. If you have hearing difficulties, please ring the Textphone service on If you would like to speak to someone in Welsh, please ring , between 8.00 am and 6.00 pm, Monday to Friday. All calls are charged at the local rate within the UK. Charges may differ for mobile phones. Other notices on this or related subjects: Notice 700 is the main reference guide to VAT. It includes frequent references to more specialised publications. See Section 1 of the notice for more information. You can find helpful introductory information in: Notice 700/15 The Ins and Outs of VAT; and Notice 700/21 Keeping records and accounts.

2 2 Contents (Includes update 1 at the end of this document) 1. Introduction and other sources of information What is this notice about? Are there any changes from the previous edition? Are there other notices which can help me? How can I get free information and help? The National Advice Service How can I get advice on VAT matters? The Learn about VAT menu Other learning opportunities Updates Administration of VAT What is this section about? Visits by VAT officers Tax avoidance VAT law Misunderstanding and misdirection Extra-statutory concessions Interest in cases of Departmental error What are my rights as a taxpayer? Complaints General explanation of VAT: introduction and liability Introduction to VAT What is VAT about? How many rates of VAT are there? What supplies are reduced-rated? Is VAT payable on zero-rated supplies? Is VAT payable on exempt supplies? Where can I find further information on liability and rates of tax? General explanation of VAT: the basic mechanism for VAT How does VAT work? How do I account for VAT on my supplies? Can I claim VAT relief if my customer has not paid me? When will I be making a supply of goods? When will I be making a supply of services? Business and non-business...25

3 4.7 The United Kingdom, Isle of Man and the Channel Islands Place of supply General explanation of VAT: imports, exports, acquisitions and intra-ec supplies Introduction Imported goods Warehoused goods Services received from outside the UK Free zones Exported goods Exported services Intra-EC supplies of goods General explanation of VAT: registering for VAT Requirement to be registered Are there other situations where I could be liable to be registered for VAT? Services from abroad What should I do if I am VAT registered and make some exempt supplies? What if I have separated my business into smaller parts? When is it possible to register as a VAT group or have a Divisional registration? Would I have to register for VAT if I am resident abroad? How do I register if I am part of a joint venture? Output tax: introduction and tax value What is output tax? What is tax value? What if the consideration is wholly in money? What if the consideration is not wholly in money? Other rules about tax value Cost of supply Values expressed in a foreign currency Excise duty Output tax: particular situations Mixed supplies Packaging Delivery charges (postage and packing etc) Hire-purchase, conditional sale and credit sale Second-hand goods

4 4 8.6 Exchange units Barter and part-exchange Samples of goods Gifts Loss of goods Goods sold in satisfaction of a debt Payphones and phonecards Cancellation charges, forfeited deposits and booking fees Service charges and tips Government departments, local authorities, visiting forces etc Output tax: business and non-business use Disposal of business assets...57 Use of goods or services in your business Private use of goods, including road fuel, and services Input tax: introduction and general rules What is input tax? What can I reclaim as input tax? What can t I reclaim as input tax? How do I reclaim input tax and what amount can I claim? What are the timescales for reclaiming input tax? What evidence do I need to claim input tax? Refunds of VAT paid in other countries What other publications may help me? Input tax: VAT paid on goods and services obtained before VAT registration Can I recover VAT paid before registration? What are the conditions for treating VAT on goods as input tax? What are the conditions for treating VAT on services as input tax? What are the rules for VAT on supplies before incorporation? Input tax: subsistence, staff entertainment and domestic accommodation expenses Subsistence and staff entertainment expenses Domestic accommodation...68

5 13. Input tax: partial exemption Exempt supplies and partial exemption Capital goods scheme Time of supply (tax point): introduction and general rules Introduction to Time of Supply General information about tax points Continuous supplies of goods and services Goods supplied on sale or return, approval or similar terms Change of tax rate Time of supply (tax point): other situations Goods taken for personal or other non-business use Taxable self-supplies Supplies in the construction industry under contracts providing for stage payments Supplies under contracts (other than stage payment construction contracts) providing for retention payments Supplier s goods in possession of buyer Supplies of water, gas or any form of power, heat, refrigeration or ventilation Supplies made through coin operated machines Royalties and similar payments Property Zero-rated and exempt supplies Supplies of credit (including credit facilities in hire-purchase transactions) Imported services VAT invoices: general rules Introduction to VAT invoices General information about VAT invoices What information is required on a VAT invoice? Invoicing in a foreign currency Invoicing zero-rated or exempt supplies Less detailed and modified VAT invoices Example of a completed VAT invoice VAT invoices: particular situations and rules VAT invoices for petrol and diesel oil (derv) Cash and carry wholesalers Pro-forma invoices

6 Self-billing and authenticated receipts Calculation of VAT on invoices rounding of amounts Calculation of VAT at retailers Computer invoicing Transmission of invoices Credits and debts Introduction to credits and debts Credits and contingent discounts Replacement of returned goods Goods sold in satisfaction of a debt Can I claim relief from VAT on bad debts? Records and accounts Introduction to records and accounts What records must I keep? Cash accounting scheme Keeping copies of VAT invoices Recording supplies you make and working out your output tax Record of credits allowed to customers Evidence of input tax Recording supplies you receive and working out your input tax Record of credits received from suppliers How do I adjust errors on VAT invoices? How do I correct errors I find on previous VAT returns? VAT account Claims for repayment of overpaid VAT Example of a VAT account VAT returns and payment of tax: introduction and completion of returns Introduction to VAT returns The VAT Central Unit Receipt and submission of VAT returns How do I fill in my VAT return? Tax periods Annual accounting scheme VAT returns and payment of tax: submission of returns and payment Prompt submission of returns and payments

7 21.2 Late, incomplete or incorrect returns and payments Methods of payment Methods of repayment Dealing with amounts of less than Delayed repayments Payments on Account scheme Supplies made by or through agents: general rules Introduction to supplies involving agents General information about agents How are agents involved with VAT? Liability of supplies Agents acting in the name of their principals Agents who act in their own name Registration Supplies made by or through agents: invoicing arrangements Invoicing for supplies made through a selling agent not using a margin scheme Invoicing for supplies obtained through a buying agent not using a margin scheme EC and international supplies involving UK undisclosed agents Note for UK undisclosed agents involved in domestic supplies VAT treatment of supplies involving UK undisclosed agents Supplies made by or through agents: other situations Disbursements for VAT purposes Auctioneers Exports MOT test charges Search agencies Debt collectors: solicitors charges and costs awarded by the Courts Changes in circumstances Introduction to changes in circumstances What changes require cancellation of registration? What changes require amendment of registration? Group treatment

8 Divisional registration What changes require transfer between United Kingdom and Isle of Man VAT registers? Death or incapacity Death of a partner Insolvency Transfer of a business as a going concern Voluntary cancellation Exemption from registration Agricultural flat-rate scheme Example of Form VAT Financial penalties and interest charges Introduction to penalties and charges Late registration penalty Misdeclaration Penalty and Repeated Misdeclaration Penalty Tax evasion Other penalties Reasonable excuse and mitigation Default interest Appeals Introduction to Appeals What can I do if I disagree with a decision? What is the role of the VAT Tribunals? What subjects can I appeal about to a VAT Tribunal? What are the time limits for reconsiderations and appeals? Where can I find more information about appeals? Zero-rating, reduced-rating and exemption Introduction to zero-rating, reduced-rating and exemption List of areas of business and related notices Changes in tax rates and liability Introduction to changes in tax rates and liability Definition of a change in tax rate Definition of a change in tax liability Date of change Ready reckoner Reclaiming input tax after a change in tax rate or liability Completing your VAT return Output tax

9 30.9 Supplies of services - general Continuous supplies of goods and services Facilities provided by clubs, associations etc Hire-purchase, conditional sale and credit sale Payments and VAT invoices in advance of the basic tax point Credits (not arising from the change in rate) and contingent discounts Price escalation and other upward adjustment in prices Existing contracts Second-hand goods Warehoused goods VAT Act 1994, Schedule 5, Paragraphs 1 to Apportionment of output tax Introduction to apportionment of output tax Examples of methods for apportioning output tax Apportionment of tax between business and nonbusiness activities Introduction to apportionment between activities Need for apportionment Private use Non-business activities Example of a method of apportionment Other methods of apportionment Partial exemption Standard legal abbreviations Index

10 10 1. Introduction and other sources of information 1.1 What is this notice about? This notice is the main reference guide to Value Added Tax (VAT). It provides: a guide to all the main VAT rules and procedures; help with the problems faced by business; and references to more specialised publications. Not all of the information here will apply to your business - so don t try to read it all the way through. There is an index at the back and this will help you find the information you need by referring you to a particular section or paragraph in this guide or to one of our other, more specialised publications. This section of the notice provides information about a range of sources of further information and help, including our National Advice Service. 1.2 Are there any changes from the previous edition? This notice has been restructured and rewritten to improve readability. The technical content is largely unchanged from the March 2000 edition (which was updated in May 2001). Significant changes in this edition are: Section Change 3 New information about reduced-rated supplies - paragraph New information about Non Established Taxable Persons (NETPs) and unregistered UK businesses - paragraph Updated information on hire purchase, conditional sale and credit sale - paragraph 8.4. Revised monetary limit for gifts of goods on which VAT is not due - paragraph Updated guidance on accounting for credit or debit notes - paragraph

11 19 Revised threshold for cash accounting scheme - paragraph New information in this section on use of electronic VAT returns. Revised threshold for annual accounting scheme - paragraph Revised surcharge assessment monetary level from January paragraph (b). 26 Revised guidance on death, incapacity or insolvency - paragraphs 26.7 to Are there other notices which can help me? Introductory information You may find it helpful to read these simple introductory publications before you use this guide: Notice 700/15 The Ins and Outs of VAT; and Notice 700/21 Keeping records and accounts Retail schemes If you make retail sales or provide services to the public, there are a number of special retail schemes which you may use to work out the VAT on your supplies. You should read Notice 727 Retail schemes and the associated notices which will tell you more about the individual schemes. The schemes are designed to suit different types of business, and Notice 727 will help you decide Business within the European Community (EC) If you are involved in either buying or selling goods within the EC you should read Notice 725 The Single Market. 1.4 How can I get free information and help? Some features of VAT arise less frequently or only affect certain types of business. You will find detailed guidance on these in other, more specialised notices.

12 12 There is a full list of VAT publications in Notice 999 Catalogue of publications which is usually revised in January and July each year. There is also a list of public notices available on our website. The address is You can get all publications listed, free of charge, from our National Advice Service (NAS). If you are registered for VAT you will receive a newsletter called VAT Notes with your VAT return. It is usually issued quarterly with VAT returns and provides brief topical notes about VAT and details of new and revised VAT publications. If you can t find the answer to your query in these publications, you can contact our National Advice Service for help. 1.5 The National Advice Service Our National Advice Service deals with all general telephone enquiries from both businesses and the public Contact details Service National Advice Service Telephone Number Opening Hours (Monday to Friday) am to 8.00pm. Textphone service, for customers with hearing difficulties Welsh speaking service am to 8.00pm am to 6.00pm What the National Advice Service deals with The service is for all general enquiries about our taxes and duties, including VAT, Excise, Customs, Insurance Premium Tax, Landfill Tax, Aggregates Tax, Air Passenger Duty, Climate Change Levy and Mineral Oils. For example, you can call the service if you have a question about: our rules and procedures; rates of duty or tax chargeable on particular goods; requests for publications, such as forms or notices; and

13 requests for duplicate VAT returns. 13 Large businesses assured by Large Trader Teams can still contact their dedicated team for information and advice What the National Advice Service does not deal with The service cannot deal with any questions about case specific transactions. For example:- If you have a question about how to clear an existing debt the progress of a VAT registration or the amendment or cancellation of a VAT registration Then you should call your regional Debt Management Unit. the National Registration Service. See paragraph for information about how to contact the Service. See Section 26 for guidance on changes in circumstances that may require cancellation or amendment of a VAT registration. the progress of a specific import entry the progress of a request to use one of our schemes matters arising from a visit by one of our officers Customs at the port or airport of importation. the office you sent the application to. the officer direct. 1.6 How can I get advice on VAT matters? To help us to give you the best service, please always give us the full facts. Most enquiries can be dealt with by a telephone call to our National Advice Service. However, for your own protection, you should put any detailed questions in writing. See Notice 700/6 Rulings for further details. If you wish to write, you can find a list of written enquiry teams on our website or you should find the address in your local phone book under Customs and Excise. If you have any problems, please contact our National Advice Service.

14 14 If you wish to contact us by , you can find our regional addresses on our website. Tax accountancy profession You can also get help and advice about how to keep your VAT affairs in order from members of the tax accountancy profession. However, there is no requirement to employ an accountant and if you choose to do so, responsibility for the accuracy of your VAT affairs remains with you, the taxable person. 1.7 The Learn about VAT menu Shortly after registering for VAT, businesses will be offered the opportunity to find out more about VAT by selecting their option(s) from a menu that will include a free: one-to-one consultation with one of our VAT advisors; introductory video; and seminar with question and answer session. We are committed to providing newly registered businesses with the option(s) of their choice within three months of receiving their request(s). 1.8 Other learning opportunities Our VAT staff provide talks and presentations to businesses (new or established) through other organisations such as Chambers of Commerce, Business Link offices and Training and Enterprise Councils (TECs). Many VAT offices also hold open days or evenings for the benefit of local businesses. 1.9 Updates From time to time, the VAT rules change or we decide to make clearer the guidance given on a particular point. We do this by issuing a revised edition of the publication or by issuing an update for the existing notice. All revised editions and updates are listed on the recent editions page of our website and in the next available editions of VAT Notes, and Notice 999 Catalogue of publications. We try to keep the number of revisions and updates to the minimum but it is important that you keep yourself up to date by noting these changes, otherwise you may find that you are not accounting for VAT properly.

15 15 2. Administration of VAT 2.1 What is this section about? This section explains: the purpose of visits that you will receive from our officers and what you can expect; our approach to tax avoidance; the law; what we can do in cases of misunderstanding, misdirection or Departmental error; and your rights as a taxpayer and how to complain. Other administrative aspects are dealt with elsewhere in the notice: Guidance on is in Registration Sections 6 and 26 VAT returns and payment of VAT Sections 20 and 21 Penalties and interest charges Section 27 Appeals Section Visits by VAT officers From time to time you will be visited at your principal place of business by an officer from your VAT office. The officer will examine your business records, methods and premises and give you guidance. The reason for this is to ensure that the correct tax is accounted for at the right time. We want you to pay no more and no less than is due When will you visit me? This will depend on the size and complexity of your business and your past compliance with legislation. Businesses which send in late or incorrect declarations and payments are visited more often. It is therefore in your interest to ensure that your declarations are correct from the outset.

16 16 Before we visit we will agree a mutually convenient appointment date and time. On occasion we will call without an appointment. One reason for this may be to see the day to day operation of the business How long will a visit last? Officers aim to carry out their duties with as little inconvenience to you as possible. For a small business, a visit may only take a few hours - for a large or complex business it can last 2 or more days What happens during a visit? During the visit our officer will: discuss with you the various aspects of your business; give an indication of the length of the visit; examine the records of the business; and advise you of overpayments as well as underpayments. At the end of the visit the officer will: review the work performed; discuss any concerns arising; and agree what is to be done in the future. Where an error is found, the officer will: describe how the adjustment will be made; agree the adjustment whenever possible; and inform you of how you may seek reconsideration of, or appeal against the decision should you disagree. There are a number of things that you can do to help the visit go smoothly. These include: advising us early of the reasons for any significant changes in the tax or duties declared by you. You should do this by writing to your VAT office; keeping your records and payments up to date; providing us with the information and explanations we request;

17 asking us if you are unsure of any matter connected with the tax. We will not normally have time to look at all aspects of your records and business, so you cannot assume that you are accounting for the tax or duty correctly on everything just because no errors are found. It is therefore in your interests to ask if you are unsure; helping us to understand your business and records; replying to enquiries within the specified time; and quoting your VAT number when you contact us. You will find out more about visits from Customs and Excise in Notice 989 Visits by Customs and Excise officers, available from our National Advice Service. 2.3 Tax avoidance Tax avoidance is not illegal. However, it can give a business an unfair tax advantage over others, and puts at risk tax simplification measures. We have to take action to counter this and will continue to do so. That action includes the use of litigation, or the introduction of new legislation. 2.4 VAT law VAT law in the European Community is governed by various Directives, notably the Sixth VAT Directive (1977). The Directives are given effect in the UK mainly by the Value Added Tax Act 1994 as amended by subsequent Finance Acts. But there are many detailed rules in Statutory Instruments. These are either orders made by the Treasury or regulations made by Customs and Excise. Copies of the Act and of Statutory Instruments are available from Stationery Office bookshops. Generally speaking, this notice and the other VAT notices explain how Customs and Excise interpret the VAT law. However, sometimes the law says that the detailed rules on a particular matter will be set out in a notice or leaflet published by Customs and Excise rather than in a Statutory Instrument. When this is done, that part of the notice or leaflet has legal force, and that fact will be clearly shown at the relevant point in the publication. 17

18 Misunderstanding and misdirection Misunderstanding In certain circumstances, we may exceptionally take no further action about VAT undercharged by a taxable person as a result of a genuine misunderstanding which does not concern anything clearly covered in our published guidance, or in specific instructions given to that taxable person Misdirection If a Customs and Excise officer, with the full facts before him or her, has given a clear and unequivocal ruling on VAT in writing or, knowing the full facts, has misled a taxable person to that person s detriment, any assessment of VAT due will be based on the correct ruling from the date the error was brought to the taxable person s attention. Both these concessions can only be applied with our prior agreement. If you think that either of them applies to you, you should contact your local VAT Business Centre. You can find further information in Notice 48 Extra-statutory concessions. 2.6 Extra-statutory concessions In certain circumstances where remission or repayment of VAT is not provided for by law, we may allow relief on an extra-statutory basis. The use of a concession may be restricted, for example, if it is used for the purpose of tax avoidance (see paragraph 2.3). You will find more about this and a list of these concessions in Notice 48 Extra-statutory concessions. 2.7 Interest in cases of Departmental error You can claim interest where, as a result of an error on our part you: have paid too much VAT; have underclaimed VAT; or were prevented from recovering VAT at the proper time. You can claim for the period of time during which you have not been able to use your money.

19 You should make your claim in writing to your local VAT Business Centre, who will consider each case on its merits What are my rights as a taxpayer? As a taxpayer, you have important rights and entitlements. These are laid down in Notice 400 HM Customs and Excise Charter. It includes standards of service which specifically relate to our administration of: VAT; excise and inland customs; and the import and export of freight. Your cooperation in all aspects of the tax collection process is appreciated. You can get copies of Notice 400 from our National Advice Service. Under the Open Government Code of Practice on Access to Government Information you are entitled to see certain information held by Customs and Excise. See Notice 950 for further details. 2.9 Complaints Although our aim is always to provide a high standard of service, sometimes things may go wrong. If they do, we have internal procedures for handling complaints fairly and speedily. Whenever possible, you should try to resolve your complaint on the spot with our officer, but if you are unable to do so you should contact one of our Regional Complaints Units. If you are not satisfied with the decision, you can ask the Adjudicator to look into your case. The Adjudicator s service is free. The Adjudicator is a fair and unbiased referee whose recommendations are independent. The address is: The Adjudicator s Office Haymarket House 28 Haymarket London SW1Y 4SP Tel: (typetalk facilities are available) Fax:

20 20 Or visit the website at Our complaints procedures are more fully explained in our code of practice Complaints and putting things right (Notice 1000). The Adjudicator s Office also produces its own notice How to complain about Customs and Excise. Both notices are available from our National Advice Service.

21 21 3. General explanation of VAT: introduction and liability 3.1 Introduction to VAT The next four sections explain the basic principles of VAT. Section Contents 3 introduces VAT and gives information about VAT liability and rates of tax. 4 explains how VAT works and tells you about some of the mechanics of VAT. 5 outlines the basic rules on imports, exports, acquisitions and intra-ec supplies. 6 deals with registration and tells you when you might need to register. You will also find it helpful to read Notice 700/15 The Ins and Outs of VAT, which provides a brief guide to input tax and output tax for VATregistered businesses. 3.2 What is VAT about? VAT is a tax on consumer expenditure. It is collected on business transactions, imports and acquisitions. Most business transactions involve supplies of goods or services. VAT is payable if they are: supplies made in the United Kingdom (UK) or the Isle of Man; by a taxable person; in the course or furtherance of business; and are not specifically exempted or zero-rated. Supplies which are made in the UK or the Isle of Man and which are not exempt are called taxable supplies. A taxable person is an individual, firm, company etc who is, or is required to be, registered for VAT. A person who makes taxable supplies above certain value limits is required to be registered.

22 22 A person who makes taxable supplies below these limits is entitled to be registered in the UK on a voluntary basis if they wish, in order, for example, to recover VAT incurred in relation to these taxable supplies. In addition, a person who is not registered for VAT in the UK but acquires goods from another EC member state, or makes distance sales in the UK, above certain value limits may be required to register for VAT in the UK (and such persons may register voluntarily if their acquisitions or distance sales are below these limits). There is more about these matters in Section 6. Supplies are outside the scope of the tax if they are: made by someone who is not a taxable person; made outside the UK and the Isle of Man (but see paragraph for special place of supply rules for certain international services); or not made in the course or furtherance of business. 3.3 How many rates of VAT are there? There are three rates of VAT: a standard rate, currently 17.5%; a reduced rate, currently 5%; and a zero rate. 3.4 What supplies are reduced-rated? Supplies of these goods and services are currently charged at the reduced rate: domestic fuel or power; installation of energy saving materials; grant funded installation of heating equipment or security goods or connection of gas supply; renovation and alteration of dwellings; residential conversions; women s sanitary products; and

23 children s car seats Is VAT payable on zero-rated supplies? VAT is not payable on zero-rated supplies, and an invoice for a zerorated supply will not constitute a VAT invoice (paragraph explains why this is important for tax point purposes). However, zero-rated supplies are treated as taxable supplies in all other respects, including the right of the person making the supply to recover the VAT on their own business expenditure (subject to certain restrictions - see paragraph 4.6). 3.6 Is VAT payable on exempt supplies? Some supplies are exempt from VAT, which means that no tax is payable - but, equally, the person making the supply cannot normally recover any of the VAT on their own expenses. However, it is possible to choose to standard-rate some supplies of property which would otherwise be exempt. If you elect to waive the exemption more commonly known as opting to tax - all supplies you make of a property will, in most cases, be taxable (see paragraph (b) and Notice 742A Opting to tax land and buildings). 3.7 Where can I find further information on liability and rates of tax? Section 29 tells you about the areas of business where some supplies may be exempt or zero-rated. It also lists the notices which tell you more about this. If you have read Section 29 and you think that any of your supplies might be zero-rated or exempt, you should read the appropriate notice. If the rate of tax or the liability of something you supply changes, you should read Section 30.

24 24 4. General explanation of VAT: the basic mechanism for VAT 4.1 How does VAT work? If you make standard-rated supplies, you have to account to Customs and Excise for the VAT due. This is your output tax. You will normally charge the VAT to your customers. If your customers are registered for VAT and the supplies are for use in their business, the VAT is their input tax. In the same way, VAT charged to you on your business purchases is your input tax. As a registered person, you can reclaim from Customs and Excise as much of the VAT on your purchases, and imports, as relates to the standard-rated, reduced-rated and zero-rated supplies you make. In principle, you cannot reclaim VAT which relates to any non-business activity or to any exempt supplies you make. 4.2 How do I account for VAT on my supplies? At predetermined intervals you pay to Customs and Excise the excess of your output tax over the VAT you can reclaim as input tax. However, if the input tax you can reclaim is more than your output tax, you can reclaim the difference from us. 4.3 Can I claim VAT relief if my customer has not paid me? If you make taxable supplies of goods or services to a customer for which you are not paid, you may be able to reclaim relief from VAT on the bad debts. You can find out more about this in Notice 700/18 Relief from VAT on Bad Debts. 4.4 When will I be making a supply of goods? You supply goods if you pass the exclusive ownership of goods to another person. You also supply goods if you: transfer them under an agreement such as a hire-purchase agreement - but not if you transfer such an agreement; provide water or any form of power, heat, refrigeration or ventilation; but not if you hire out equipment which does this - that is a supply of services (see Notice 701/19 Fuel and power and Notice 701/16 Water and sewerage services);

25 supply a major interest in land; broadly speaking, the freehold, or in Scotland the dominium utile, or a lease exceeding 21 years (see Notice 742 Land and property and Notice 708 Buildings and construction); or transfer goods permanently out of the business for your private use. You do not make a supply if you provide goods (such as overalls or tools) to employees solely for the purpose of their employment and make no charge. 4.5 When will I be making a supply of services? You supply services if you do something, other than supplying goods, for a consideration. A consideration is any form of payment in money or in kind, including anything which is itself a supply (see paragraph 7.2). You also supply services if you: lend goods to someone for use outside your business; hire goods to someone; produce goods from someone else s materials; use goods owned by the business outside the business; agree, for a consideration, to refrain from doing something; or agree to grant, assign or surrender a right for a consideration. If you supply services, you should read Notice 741 Place of supply of services. 4.6 Business and non-business Introduction It is very important to understand the difference between business and non-business activities: you must account for VAT on all the taxable supplies you make by way of business, and you can treat as input tax VAT charged on goods and services which you get for your business (see Section 10) but 25

26 26 if you also carry out non-business activities, it could affect the amount of VAT you can treat as input tax. VAT charged on goods and services which you do not get for your business is not input tax and you cannot reclaim it What does business mean? In VAT terms, business means any continuing activity which is mainly concerned with making supplies to other persons for a consideration (see paragraph 4.5). The activity must have a degree of frequency and scale and be continued over a period of time. Isolated transactions are not normally business for VAT purposes. It includes: the way in which self-employed people carrying on any trade, vocation or profession, as well as companies, earn an income; the provision of membership benefits by clubs, associations and similar bodies in return for a subscription or other consideration; and admission to premises for a charge. It may also include: the activities of clubs and other recreational bodies; and some of the activities of charities and non-profit making bodies. However, even if your activities have some or all the characteristics of a business, they are not business if they are essentially a recreation or hobby and the making of taxable supplies is only incidental to this Non-business If you have any non-business activities, you will not be able to reclaim all the VAT you are charged on your purchases. This is because the VAT charged on goods and services used for nonbusiness purposes is not input tax and cannot be reclaimed.

27 4.6.4 Examples of non-business activities Purely private or personal activities are, of course, non-business. Many charities, philanthropic and voluntary bodies and other nonprofit making organisations have non-business activities. For example, these may all be non-business activities: 27 providing free services or information; maintaining museums, parks or historic sites (unless there is an admission or other charge); and publicising religious or political views. An activity which is carried out mainly as a hobby, such as stamp collecting, is not a business. However, if you start to sell items you collect, or have made, on a regular and continuing basis, then, under the rules outlined above, your hobby could become a business for VAT purposes. If you want to know whether this affects you, you can telephone our National Advice Service or write to your nearest enquiries office Some particular situations (a) Grants or donations Non-business activities are often financed largely from grants or donations. As long as those making the grants or donations receive no direct benefit in return, this income is not the consideration for any supply and is outside the scope of VAT. (b) Activities are mainly non-business A body whose main activities are non-business may still have some activities which count as business for VAT purposes, such as selling goods to raise funds, running a staff canteen or charging admission fees. If the taxable turnover from these activities is over the registration limits, the body should be registered for VAT. (c) Charities Notice 701/1 Charities gives more information on non-business activities for such bodies. (d) Local authorities and similar bodies Special rules apply if you are a body covered by the Value Added Tax Act 1994, Section 33 (see Notice 749 Local authorities and similar bodies).

28 What if I am involved in both business and non-business activity? If you are charged VAT on goods and services which you get for your business your non-business activity both business and non-business activity Then you can treat this as input tax (see Section 10). cannot treat this as input tax. (see above). must apportion the VAT (see Section 33). 4.7 The United Kingdom, Isle of Man and the Channel Islands United Kingdom The United Kingdom is made up of Great Britain, Northern Ireland and the territorial waters. It does not include the Channel Islands or the Isle of Man. However, for VAT purposes the Isle of Man is treated as part of the UK. If you have customers or suppliers in the Isle of Man, the VAT rules are the same as if they were in the UK. Goods sent from the UK to the Isle of Man or vice versa do not count as imports or exports for VAT purposes Isle of Man VAT is chargeable in the Isle of Man under Manx law which generally parallels UK legislation. References in this notice to the UK also apply to the Isle of Man unless the text indicates otherwise Channel Islands There is no VAT in the Channel Islands. Goods passing between the Channel Islands and the UK or the Isle of Man are imported or exported for VAT purposes. See Section 5.

29 4.8 Place of supply Introduction To be within the UK VAT system a supply must be made in the UK. Supplies made outside the UK are outside the scope of UK VAT. Separate rules apply for working out the place of supply for goods and services. These are set out below Goods If your supply involves goods located in the UK when supplied goods located outside the UK when supplied goods you install or assemble in the UK goods you install or assemble outside the UK goods you supply from the UK to another EC Member State under distance selling arrangements see Notice 700/1 Should I be registered for VAT? where the value of your supplies in a calendar year is below the distance selling threshold set by that Member State goods you supply from the UK to another EC Member State under distance selling arrangements see Notice 700/1 Should I be registered for VAT? where the value of your supplies in a calendar year is above the distance selling threshold set by that Member State the importation of goods by you, or under your directions, from outside the EC the importation of goods from outside the EC by your customer Then your supply takes place in the UK. outside the UK. in the UK. See Notice 725 The Single Market for further information. outside the UK. in the UK. in the EC Member State to which the goods were delivered. in the UK. outside the UK.

30 30 the removal of goods from the UK for export outside the EC or to another EC Member State outside the distance selling arrangements see Notice 700/1 the removal of goods to the UK from another EC Member State, outside the distance selling arrangements see Notice 700/1 in the UK. in the Member State from which the goods were removed. Note: Where supplies take place in the UK, the supplier may be liable to register here and account for VAT on their supplies. No UK VAT would be chargeable on supplies that take place outside the UK. If you are unsure about the place of supply of goods, you can get further advice by calling our National Advice Service, or writing to your nearest enquiries office Services You supply services in the place where you belong (this is known as the basic rule) unless they are of a type for which there are special place of supply rules. You belong where you have a business or some other fixed establishment, including a branch or agency. If you have no such establishment, you belong where you usually live. In the case of a company this is where it is legally constituted. If you have establishments in more than one country, the supply takes place at the location of the establishment most directly concerned with the supply. Special place of supply rules include the following: services relating to land and property; services involving physical performance; passenger transport; freight transport including intra-ec transport and related ancillary services and the services of intermediaries arranging those supplies; the hiring of means of transport; goods on hire; telecommunications services;

31 certain intermediary services; and services supplied where received - mainly intellectual in character - (listed in the VAT Act 1994, Schedule 5, paragraphs 1 to 8 - see Section 31 of this notice). If you buy from a third party travel, hotel, holiday and certain other supplies of a kind enjoyed by travellers, and resell them as principal, or as an agent acting in its own name, there are different place of supply rules. See Notice 709/5 Tour operators margin scheme. You will find more information about this subject in Notice 741 Place of supply of services. 31

32 32 5. General explanation of VAT: imports, exports, acquisitions and intra-ec supplies 5.1 Introduction VAT is not only a tax on supplies. It is also a tax on the importation or acquisition of most goods - and of some services - received from outside the UK. 5.2 Imported goods When goods are imported into the UK from outside the EC, VAT is normally due at the same rate as on a supply of those goods in the UK. VAT must be paid when you import the goods or, if you or your agent is approved for duty deferment, you can defer payment with any duty. If you import goods into the UK from outside the EC, you should read Notice 702 Imports and Notice 101 Deferring duty, VAT and other charges. 5.3 Warehoused goods Similar arrangements to those above apply if you remove goods from an approved warehouse. You should read the following Notices: Notice number Title 197 Excise goods: Holding and movement, 179 Mineral (Hydrocarbon) Oils: Duty and VAT: Warehousing and related procedures, or 232 Customs warehousing, and 702/9 Warehousing and free zones. 5.4 Services received from outside the UK If you receive from outside the UK for business purposes, any of the services listed in Section 31, the services are treated as if you supply them, and you must account for output tax on them.

33 If you have read Section 31 and you think that you might receive services of this kind from outside the UK, please read Notice 741 Place of supply of services. If you receive from outside the UK any of the services listed in Section 31, their value counts towards your taxable turnover. This applies even if the only supplies you make in the UK are exempt. If you are registered for VAT in the UK 33 And you receive any service, the place of supply of which is the UK (other than those listed in the VAT Act 1994, Schedule 5, paragraphs 1 to 8 - see Section 31 of this notice) from a person who belongs outside the UK Then you may be required to account for VAT under the reverse charge procedure (see Notice 741 Place of Supply of Services ). If you are a non-uk supplier of these services and your customer does not supply a UK VAT registration number, please see Notice Free zones VAT is not due on the importation of goods into a free zone. Import VAT is due only on goods removed from a free zone into the rest of the UK and on goods used or consumed within a zone. If goods of UK origin which have been in a free zone are removed in an unaltered state, for home use manufactured in a zone are removed into the UK for use in the owner s business, as opposed to being sold or disposed of Then import VAT is not due. due only on the value of any imported elements of the goods. Supplies of goods and services to, from and within a free zone are taxable in the normal way. If you need more information you should read Notice 702/9 Warehousing and free zones.

34 Exported goods If you export goods to a customer outside the EC, your supply is normally zero-rated provided that you meet the appropriate conditions. There are a number of notices which deal with exports. You will find out more about these, and the conditions which you must meet to zero-rate your supplies, in Notice 703 Exports and removals of goods from the United Kingdom. 5.7 Exported services Some supplies of services to overseas customers are zero-rated, but many are standard-rated. You will find more about this in Section Intra-EC supplies of goods If you supply goods to a VAT-registered customer in another EC Member State and the goods are removed from the UK to another EC country, your supply may be zero-rated provided you meet the appropriate conditions. You will find out more about the VAT treatment of supplies of goods within the Single Market, and the conditions you must meet to zerorate your supplies, in Notice 725 The Single Market EC Sales List Since 1 January 1993, UK traders registered for VAT who make supplies of goods to traders registered for VAT in the other Member States have been required to send in lists of their EC supplies. The EC Sales Lists are used to control the taxation on movements of goods within the EC. You will find more details about EC Sales Lists in Notice 725 The Single Market Intrastat You should show the value of the supply to or acquisition of goods from other EC Member States in Boxes 8 or 9 respectively of the VAT return. Depending on the level of your trade with other EC Member States, you may be required to submit more detailed statistical declarations. These are known as INTRASTAT Supplementary Declarations.